Investing Your Money (3)

Step 3 - Know the concepts of investing

• Diversification

          To vary your investment. Diversification is a way of minimizing risks and protecting you from volatility in a particular asset class or industry.

          Different types of investments are exposed to different risk and by diversifying, the losses in some investments can be offset by other investment gains.

• Time Value of Money

          Time is the greatest asset for anyone who wants to invest. The earlier you invest, the greater is your return on the value of your money.

          This is due to the concept of compound interest where you will earn interest on your original investment and the interest earned.

• Impact of Inflation and Taxes

          Proper planning and ensuring a minimum average rate of return on investment in the longer term is also crucial as the money you have today may not be able to buy you the same amount of things in the future. The investment goal is for your money to grow above the rate of inflation.

          Tax will also reduce your return on investment unless your investments are tax exempted. Therefore, you should invest in an asset which allows you to get the best return after taking into consideration the effect of taxation and inflation in the longer term.

• Maximising Returns

          The time needed for your money to double can be calculated using the Rule of 72. Divide 72 by the rate of interest you earn on your savings. If the return calculated is unsatisfactory, you may consider other options that pay a higher rate of return.

• Ringgit Cost Averaging

          "Ringgit cost averaging" is a technique widely practiced in the unit trust industry. It involves investing a fixed amount of money for specified interval such as monthly, quarterly or yearly regardless of how the stock market performs.

          When fund prices are higher, the additional money invested will buy fewer units but when prices are lower, the same amount of money allows you to buy more units. Implicit in this approach is that at some point in time, markets will recover as they move in cycles, at which time profits can be taken.

• Risk-Return Relationship

          There are many types of investments in the market and each has a different level of risk and expected return.

          Certain types of investments (e.g. savings bond) tend to be"safer" than others, meaning your original investment is preserved but the rate of return may be lower. Investments which promise higher returns (e.g. equity unit trust or shares) will also have higher risks.

          As a result of the risk return trade-off, you have to consider the level of risk associated with different types of assets and choose the appropriate asset to invest.

• Understanding Risk

          Risk is an indicator of expectation about the potential gain or loss associated with investing over time. If you expect to make a large gain in a short period of time, the risks would be high. However, if you prefer long term investments, the level of risk would be lower. As the time period of an investment becomes longer, the variation and volatility in returns tend to be lower.

CONTACT ME NOW: 016-6825195

Source: bankinginfo.com.my